New Startup Guide: How do you fund your software development ?

Inovatyv
February 9, 2024

New Startup Guide: How do you fund your software development ?

Whether you're an established organisation or a startup in need of building a software product or a solution, the question on how to fund your software development is an ever persistent one. There are often a variety of ways in which companies build their software product or solution. Some companies may go the hiring route and put together an in-house development team; many engage a consulting company to work with them as digital partners like us at inovatyv.com and then there are those that outsource their work to a development house. However your mode of development may be in this blog, we've put together a couple of ways that you can use to fund your software development in a painless way!

Raise money through an equity round or using a convertible note

This is great if you are an early stage startup. Giving a portion of your startup to an investor in return for cash is a great way of raising money to work on your software development. Money raised through equity financing rounds is not always just spent behind product development, but a variety of other areas like marketing, user research, and so on. So if this is an approach that you are keen on taking then it's important that you budget out your expenditures well, so you can get enough traction on your product to reach either revenue or the next valuation target.

Pros : It's nearly risk-free. Depending on the financial instrument you use to raise this round. Most often early stage startups tend to use Y Combinator's SAFE note or use a convertible note for raising money. It's rare that Angel investors invest in an early stage company directly on an equity basis.

Cons: You are giving up a portion of your company. If you are a company that's already revenue generating then there are other better ways to raise this money, as we've covered below. Giving up ownership of your company is riskless but is usually a big cost on to the company.

Get revenue based financing

Revenue-based financing is a kind of debt financing except but not quite. According to Investopedia, In this method firms can raise capital by pledging a percentage of future ongoing revenues in exchange for money invested. A portion of revenues will be paid to investors at a pre-established percentage until a certain multiple of the original investment has been repaid. For example, let's say you're taking a funding of 50,000 dollars. After a certain period as stated in the terms you pledge, say 10% of your income that comes into the company in paying off this 50,000 + the multiple of it (2x, 3x, 0.5x). These revenue-based financing bodies earn their share through the "pre-established multiple".

Pros: If you have steady revenue coming into the company, like most SMEs who have been around for a couple of years, this method is a fantastic way of raising money without giving out equity or taking a loan from the bank. It's in-between debt financing and equity financing.

Cons: You need to be revenue generating. This is not an ideal method if you are an early stage startup without a revenue-generating product.

At Inovatyv we work with many partners. One such good friend of ours is ChocoUp. If you are in Singapore, this is definitely a company you'd want to check out. ChocoUp's advisory and friendly staff can answer all your questions regarding revenue-based financing.

Getting a Business Bank loan

This is an age-old option and often not a preferred one because of the risks involved. When you take a loan from a bank, it usually comes with a payable interest after a certain period of time. This interest percent can vary or remain fixed and unlike revenue-based financing - it is not tied to your revenue. If you aren't able to payback, the consequences can get ugly. For an early stage Startup or even SMEs, this means a lot of paperwork, stringent verifications before a loan may get approved. Depending on the level of complexity of your software, your software development costs may range from 30K USD to over 300K USD for an enterprise-grade software. The more money raised through this method, the higher the risk of paying it back.

Pros: You can raise a lot of money through this method but it comes with it's own share of risks.

Cons: Interests may vary or if it's fixed it can range between 4 - 10 % of the total amount that does bring the sum for repayment to a big amount. Defaulting on debt can lead to bankruptcy.

Check out Government Grants

Being a Startup or SME in Singapore has its own benefits. One being the ease of getting government grants. Here are some of the grants that you can explore:

Pros: Your risk is largely reduced. Let's say a full fledged app costs about 60 -100K USD to build. Grants such as the one given by the Singapore government can fund 80% of it, bringing down your cost of ownership to approximately 10 - 20K!

Cons: Their eligibility criteria are stringent and there is a lot of paper work to do. You may want to hire a virtual assistant to do it, OR...work with our partners for a fee conditional upon approval of the grant!

Use your own invested capital or retained earnings to fund it.

This is the sweet spot! Either you have your own invested capital or your business is cash positive to spend on a new technology. This technology could be used to improve internal processes or increase your income. This is a fine way to boost your business further.

Pros: This is your money! You have no paperwork to do, banks/ lending organisations or investors to convince. You have the freedom to use this money as you please.

Cons: What you build could go to waste! New technology ventures always come with a risk of failure. For example, if you are setting up an ERP system in your company and after spending the dollars, your internal team is not successfully able to use it then it can lead to an IT failure.

Know some other ways to fund your software development? Drop us a note below! If you're a company that's found innovative ways to do it then we are all ears, and we'll love to feature you in our next blog!

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